Profitability is an essential number small business owners need to track to generate wealth. Increase your profitability, wealth flows in. Decrease your profitability and times are tougher for your business. Here are 7 strategies to improve your small business’ profitability.
1. Monthly Sales Goals
So many business owners I meet run their businesses blind. They just go with the flow and hope for the best. If you are serious about generating profits and creating wealth, you need track your business results. Tracking sales goals is a simple place to start. Figure out how many new customers and/or products you need to sell this month to generate your desired profits. Then map out a plan to get there. Depending on your industry, you might want to consider tracking daily sales goals or weekly sales goals. At a minimum, you need to be tracking sales goals monthly. This provides actionable data to help you tweak your sales process until you figure out how to exceed those sales goals.
2. Improve Processes to Create Greater Efficiency
Efficiency is a great way to improve profits. Simplify your systems and reduce or remove any processes and systems that do not add value to your customers. “Because we’ve always done it this way…” mentality kills businesses. Entrepreneurs and management need to continually reinvent the wheel. Looking for better & more efficient ways to offer your services, make your products, and cut out the fluff. Efficiency grows profits!
3. Pricing Strategy
How’s your pricing strategy working out for your small business? Lots of business owners think they need to offer sales or compete on price to make sales. This can be a dangerous strategy, since both can kill profits if not implemented properly.
Here’s some food for thought…
Let’s say you sell your product for $50. On an average month, you typically sell 100 products. Meaning you have monthly income of $5,000 ($50 * 100 = $5,000).
You want to increase sales this month. In order to sell more products, you offer a 20% discount. Bad news is that by doing so, you actually end up hurting your profitability numbers. Let’s take a look. A 20% discount would mean you sell your product this month at $40, instead of $50. By offering the discount, you were able to sell 110 products this month. The typical business owner would be thrilled that they sold 10 additional products! However, the numbers tell a different story. $40 price of the product * 110 products sold = $4,400 in sales. Even though you sold more products, your income dropped by $600! ($5,000 – $4,400 = $600)
This business owner needs to sell 125 products to make $5,000 this month. The sale is only effective if he can sell more than 125 products during the sale.
4. Profit Margin per Sale
The most profitable business owners we work with track their profit margin. They know the monthly profit margin of their entire business each and every month. More importantly, they take it a step further and track the profit margin on every sale. This helps them discover their most profitable products and services. Allowing them to focus their team’s efforts on offering and selling more profitable products and services. You can also use this data to improve the profitability on your loss leaders. If it’s not possible, then it’s probably time to bite the bullet and discontinue offering these profitability killers. Stop chasing dollars that actually cost you money.
5. Reduce your Break-Even Point
The break even point is the amount of sales needed to cover your expenses. When you bring in more money than your expenses (break-even point), your business starts to generate a profit. It’s important to know your expenses, track your expenses, understand your expenses, and don’t let your expenses get out of control. By keeping expenses low, you can keep your break-even point low. Thus making it easier to run a profitable business.
6. Add Value to Your Customers
What do your customers really care about? This can be a hard thing to figure out. A lot of business owners think their customers care about what they care about. In reality, their customers value something different. Talking to your customers might shed a different light on what they value and want from your business.
7. Track and Improve Lead Conversions
Lead conversion measures the effectiveness of your sales process. The fist step is to start tracking the number of leads you successfully close, out of the total number of leads for the period. Let’s say your team was successful in closing 10 out 100 leads this past month. This means your sales department closes every 1 out of 10 leads. If you can improve your sales process to close 2 leads out of every 10, you’ve just doubled your number of sales. This will have a significant impact on improving your small business’ profitability.
Profitability is an important part of running a successful business. As you can see, there are numerous ways to improve your company’s profitability. Pick one of the above suggestions & give it a try. When you master that, start working on another strategy to improve your profitability. Feeling overwhelmed? Give us a call, our outsourced controllers can help you put these profitability strategies into place.